Investing in Cities for Inclusive Growth

Integration of affordable-housing investment with public transport may be one of the most powerful tools to foster vibrant cities and counter inequality.

While affordable housing and access to public transportation are each well-known as critical for low-income communities, it is the integration of these two efforts that can be game-changing in fostering inclusive and equitable growth.

Too many American cities today are struggling with the vicious cycle of rising rents in centrally located neighborhoods, causing low-income families to move ever further into outlying areas with lower cost housing that make it harder to access jobs, social services, and community amenities. By fostering the construction or preservation of affordable housing near convenient public transportation, equitable transit-oriented development (eTOD) can form a critical bulwark against this trend and help promote vibrant, economically diverse communities that are places of opportunity for low-income Americans, according to a recent paper authored jointly by the Low Income Investment Fund (LIIF) and Morgan Stanley.

Anchoring Families

Communities like these can anchor families in a stable environment, with access to local schools, healthcare and healthy foods; while mass transportation options connect the neighborhood to other communities, providing short commutes to work, social or cultural opportunities, institutions or events elsewhere in the city. Effective transportation also promotes the daily flow of people in and out of communities, the lifeblood of an ever changing and evolving urban society.

While this may sound like a simple solution, actually putting eTOD into practice requires significant planning, as well as collaboration between public policy makers and private sector investors. Because the investment planning cycles for transportation and affordable housing occur separately, on different timelines, and through different authorities, too often, these key pieces of infrastructure end up misaligned. However, the thoughtful and deliberate deployment of private investor capital, in partnership with government and philanthropy, can help drive strategic alignment.

Over the next 10 years, the federal government will earmark more than $1 trillion for public transportation infrastructure and over $500 billion for affordable housing, according to the report. But how those investments affect the communities where they land will depend, at least in part, on coordinating transportation and housing planning decisions.

Playing a Critical Role

“At Morgan Stanley, we believe that private sector capital can play a critical role in driving resources toward the solutions to some of the biggest environmental and social challenges we face,” says Audrey Choi, Managing Director and CEO of the Morgan Stanley Institute for Sustainable Investing and co-author of the report. “Equitable transit-oriented development projects enable us to put private sector capital to work in ways that incentivize these kinds of multidimensional, cross-sector partnerships that can provide economic opportunity, social mobility, and cultural diversity for all community members.”

As one example, eTOD is already being implemented in places such as the San Francisco Bay Area, where LIIF partnered with Morgan Stanley and other investors in 2011 to raise $50 million for the Bay Area Transit-Oriented Affordable Housing (TOAH) Fund. This fund combined $10 million of government “seed” money with $40 million from private and nonprofit investors. Importantly, all investors—public, private, and nonprofit alike—agreed to a longer time horizon to align investment expectations with the timing of transportation and housing planning cycles.

The inclusion of private investors with a longer horizon for risk-adjusted returns was key. In TOAH’s case, it enabled the fund to issue loans that mature in 10 years, compared with the usual three-year land acquisition loan, thereby allowing for the strategic coordination of the public transportation planning and housing construction cycles.

Providing a Model

So far, TOAH has invested $30 million in Bay Area eTOD projects, including one in the Tenderloin district that will provide 113 units of affordable family housing and street-level retail space, including the neighborhood’s first full-service grocery store. “This project will enable poor families with children to remain in a census tract that is currently high-poverty, but under significant upward market pressure, and which is bordering an area defined as ‘high opportunity,’ ” the report explains.

TOAH was one of the first large-scale eTOD funds to date. Other cities in the U.S., such as Denver, Salt Lake City and Los Angeles, have launched or are exploring funds that connect affordable housing and transit. “This model hopefully helps other regions not only coordinate their affordable housing strategies and transit development plans but also collaborate with different types of investors,” says Cynthia Wong, a contributor to the report and Vice President with Morgan Stanley’s Global Sustainable Finance group, which Choi also leads.

“If new transit systems are…paired with investments in affordable housing, then we can encourage mixed-income, racially diverse communities with good schools and services,” the report points out. “If not, these investments are likely to lead to ‘business as usual,’ where the major social trends of growing inequality, increasingly concentrated poverty and segregation, will be exacerbated.”

This material is a collaborative piece prepared by Morgan Stanley & Co LLC. and a third party nonprofit, the Low Income Investment Fund. This material has been prepared for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. It does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Morgan Stanley Smith Barney LLC & Morgan Stanley & Co LLC (collectively "Morgan Stanley") recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Morgan Stanley Financial Advisor or Private Wealth Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.

The views and opinions expressed in this material are as of the time of this writing and do not necessarily represent those of Morgan Stanley, its affiliates or its other employees. Of course, these views may change without notice in response to changing circumstances and market conditions. Furthermore, this material contains forward-looking statements and there can be no guarantee that they will come to pass. Past performance is not a guarantee of future results. Indices are unmanaged and not available for direct investment.

Although the statements of fact and data in this report have been obtained from, and are based upon, sources that Morgan Stanley believes to be reliable, we do not guarantee their accuracy, and any such information may be incomplete or condensed.
CRC: 1618625 Exp: 10/2017